RBI’s NPA bitter pill comes with some side effects

The RBI’s revised framework for stressed loans may prove to be disastrous and seems ill timed for an economy that is just recovering from twin policy blows of demonetisation and GST implementation.

Though there are long-term benefits of administering such a bitter pill, the short-term risks are significant, say bankers.

“This (revised NPA framework) is one more shock for the banking industry, which is not that strong any more. Don’t be surprised if 25 per cent of the banking system is NPA in one year’s time from now,” said a banker.

The short-term implication is the risk of about ₹3 trillion worth of loans, where payments have remained outstanding for 60-90 days, slipping into NPA category, requiring banks to make enhanced provisions.

There may be increase in bad loans due to slippages from Special Mentioned Account (SMA) category. Accounts that remained unpaid for 60-90 days are categories as SMA2.

Critics in the banking industry point out that the new framework is very stringent on NPA recognition and is being introduced at a time when other pieces in the ecosystem are found wanting.

‘Bits and pieces approach’

This bits and pieces of policy making will not help and the need of the hour is a coordinated approach and not a silo approach, a senior Finance Ministry official said.

Different segments need to play together like an orchestra if good outcomes are to be derived, according to this official, who said that government is cognisant of this requirement.

The other aspects that need attention include ensuring government departments make their payments to vendors within 60 days.

For instance, if a bank discounts a bill for supplies made by a corporate to a government department and the government department does not pay within say 60 days, the entire working capital of the company is blocked, putting it at risk of defaulting with the bank under the new framework.

The situation is similar when funds get blocked under tax disputes which are taking years to get settled. So there has to be reforms to ensure efficiencies in these areas. Tightening banking systems without addressing these other aspects will not prove fruitful.

“You now want your banks to count for NPA from 61st day (Special Mentioned Account 2) itself. This will be the case when even government departments don’t settle their vendor bills in 60 days in India. We should first get the other pieces of reforms right before tightening the screws on banks. How many tax disputes get settled in 60 days in India?”, a banker asked.

It was pointed out that banks are yet to get fully readjusted to 90 days NPA norm and now the 60-day aspect is getting introduced.

‘Reset’ woes

“The banking system has to now reset for the 61st day. Are we ready to start the resolution process on 61st day? This new NPA framework does not differentiate between MSME and large companies.”

It’s nice to sit in ivory towers and profess that twin balance sheet challenge needs immediate attention in terms of banking reforms and regulations.

“We are not a country only of Tatas and Ambanis. There are so many small borrowers who are practically one man shows.

“There are some of the suppliers who have borrowing of over ₹5 crore and yet run proprietorships, small private companies. They all get affected if there is a downturn in an economy and you still go with 61 days approach,” a former chief executive of a public sector bank said.